What is a limited company?
A limited company is a legal business structure that is registered with Companies House - the Registrar of Companies in the United Kingdom - through the process of incorporation. When a company is formed through Companies House, it becomes an individual in the eyes of the law. As such, a limited company is a completely separate individual from its owners, because it is responsible for its own actions, finances and liabilities.
Why would you want a limited company?
Limited companies have the unique advantage of allowing business owners to benefit from company profits without personal liability. The financial liability of company owners is limited to the value of their shares or financial guarantees, which means they are only required to cover business debts up to the amount they invest or agree to pay if the company runs into financial difficulty. This type of protection is known as limited liability.
One of the most important obligations of a limited company is the disclosure of corporate and financial information. This is achieved by adhering to a number of annual filing requirements and event-driven obligations, including: the submission of confirmation statements, filing tax returns and annual accounts and reporting any significant changes in the business. All of this information is placed on public record.
Any type and size of business can operate as a limited company, and there are many financial and professional benefits to be gained - limited personal liability, tax-saving opportunities, enhanced professional status and investment opportunities are the main advantages of limited company formation.
Different types of limited companies:
- Private limited by shares (LTD)
- Private limited by guarantee (LTD)
- Limited liability partnership (LLP)
- Public limited company (PLC)
- Private unlimited company
Private limited by shares (LTD)
This is the most common type of limited company structure for any type of business that wishes to make a profit for its owners. A private company limited by shares is owned by one or more ‘shareholders’, and managed by one or more ‘directors’. One person can be the sole shareholder and director of a company, or multiple people can be shareholders and/or directors of a company. This means you can set up a company limited by shares on your own.
Companies limited by shares are required to issue portions of the business as ‘shares’. Each shareholder must agree to buy one or more of these issued shares. This determines how much of the company each shareholder owns and the amount of money they are legally required to invest. If the company accrues debts that it cannot afford to pay, the shareholders must contribute the value of their unpaid shares toward the financial liabilities of the business; therefore, the number and value of each shareholder’s shares determines the limit of their personal financial liability.
Limited companies must pay corporation tax on all taxable income. Post-tax profits are then issued to shareholders in relation to the number and value of their shares. Alternatively, the company may choose to reinvest surplus income in the business.
Key features and benefits:
- Can be owned and managed by one person or multiple people.
- Personal liability of shareholders is limited to the value of their shares.
- Company enjoys limited status which is more appealing to clients, investors and lenders.
- Company can sell shares to raise capital.
- A tax-efficient way to run a profit-making business.
- Shareholders can keep all company profits for their personal use.
The legal requirements:
- Must be incorporated with Companies House.
- Minimum of one shareholder and one director aged 16 or above, but these roles can be filled by the same person.
- Registered office must be situated in the country of incorporation.
- Company details are placed on public record, including directors', shareholders' and PSC details and financial accounts.
- Articles of association must be adopted to outline the company's operational rules and regulations.
- Director is responsible for delivering a number of statutory reports to Companies House and HMRC every year and notifying Companies House when any company details change.
- Surplus income can only be taken out of the company as a director's salary, shareholders' dividends, a director's loan or reimbursement of expenses.
Private limited by guarantee (LTD)
You should register a company limited by guarantee if you are planning to run a non-profit organisation. This type of business generally falls into one of two categories:
- A non-profit company like a sports club, society, workers co-operative, etc.
- A charitable company which uses its ‘profits’ for charitable purposes only.
In most cases, a company limited by guarantee will not distribute any profit to its members (guarantors) - surplus income will be reinvested in the business, instead.
Who owns a company limited by guarantee?
A company limited by guarantee is owned by one or more ‘guarantors’. A minimum of one director must be appointed to manage the company on behalf of the guarantors; however, it is also possible for one person to be the sole guarantor and director of a company. This means you can incorporate a company limited by guarantee on your own.
Each guarantor is required to financially back the business in the form of a ‘guarantee’ - no shares are issued in this type of company. If the company accrues any debts, each guarantor is legally required to contribute the sum stated in their guarantee. This is the limit of their personal financial liability.
Key features and benefits
- This type of company has guarantors and guarantees instead of shareholders and shares.
- Guarantors protect their personal finances with limited liability - they are only responsible up to the sum of their guarantee, not the total debts of the company.
- Company has ‘limited’ status - this is preferred by many clients, suppliers and investors because of added credibility and transparency.
- Company has the option to register for charitable status (subject to the articles being in the correct format). Profits can be distributed to members if stated in the articles of association - if this option is selected, the company is unable to claim charitable status.
The legal requirements
- Must be incorporated with Companies House.
- Minimum of one guarantor and one director, but you can choose the same person to fill both positions.
- Registered office must be situated in the UK country of incorporation.
- Company details are disclosed on the public record, including directors' and guarantors' and PSC’ details.
- Memorandum of association must be created.
- Articles of association must be adopted - this is a governing document that outlines the rules and regulations for running a company, stating the company’s objects (aims), and what will be done with any residual income.
Quality Formations will complete your limited by guarantee company formation online, including the supply of standard articles of association. You can download these documents and easily edit them to reflect your non-profit organisation goals.
Limited liability partnership (LLP)
A limited liability partnership is more or less the same as a normal business partnership, but it has the added benefit of limited liability - the partners in a traditional partnership have unlimited financial responsibility for business debts, which means their personal finances are at risk if the partnership runs into difficulty or becomes insolvent. LLP partners guarantee to each pay a fixed sum of money toward business debts if the LLP cannot pay its bills. These guarantees set the limit of their personal financial liability.
The three distinctive features of an LLP are:
- It is taxed as a partnership - no corporation tax liability.
- It can appoint an unlimited number of LLP members (partners) rather than defined directors or shareholders.
- Required to comply with the Limited Liability Partnerships Act 2000 instead of the Companies Act 2006.
Who would use an LLP?
LLPs are increasing in popularity because they combine the practicality of a limited liability company and the flexibility of a traditional partnership. They are popular in sectors where partnerships are prominent - doctors, architects and solicitors, for example.
Key features and benefits
- LLP profits are shared between members.
- The LLP is ‘tax transparent’ because individual members are taxed on their own profits, rather than the business paying Corporation Tax as a single entity.
- The partnership can include other companies as members - if this is the case, profits become subject to Corporation Tax instead of income tax.
- There is no requirement for members to reside in the UK.
- Internal structure of the business can be decided collectively by the partners.
- The rights, responsibilities and duties of LLP members are usually equal, but there is a great deal of flexibility in a partnership structure which enables rights and profit distribution to vary between each member, if required.
Legal requirements of an LLP
- Incorporated through Companies House.
- Must have at least two members (there is no maximum number of members).
- At least two members must be ‘designated’ members - they are responsible for assuming additional filing and reporting duties on behalf of the LLP.
- Registered office address must be located in the UK country of incorporation.
- You must inform HMRC of your LLP’s existence and prepare an annual partnership tax return. A designated member is allocated responsibility for these duties.
- Partnerships must be set up with the intention of making a profit - an LLP is not a suitable structure for non-profit ventures.
If you are not dividing profits, rights, and responsibilities equally between all partners, you can draft an LLP Agreement or Partnership Statement to outline the terms of the partnership. Although this is not a legal requirement, we do recommend one to promote clarity and prevent disputes.
Quality Formations’ LLP formation package comes with a free LLP Agreement for those who need it.
Public limited company (PLC)
A public limited company trades on the open stock market (London Stock Exchange, for example) and sells shares to the general public. This type of limited company structure must have an issued share capital of at least £50,000; therefore, PLCs are generally reserved for larger, established corporations.
PLCs must have a minimum of one shareholder, two directors, and one qualified company secretary.